Using Bond Fund Duration Is an Art, Not a Science

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Interest-rate risk is top of mind these days given that bond yields have risen across the board thus far in 2018. The 10-year Treasury yield hovered at 2.94% on Sept. 7, up from 2.4% at the end of last year, and the Bloomberg Barclays U.S. Aggregate Bond Index has fallen 1.4% for the year thus far. Looking at duration is a key first step in understanding that dynamic.

One problem with duration is that it doesn't--and can't--always provide the answers investors expect from it. The 2008 financial crisis and the resulting market shocks provided a very stark illustration of the issue. Most diversified bond funds struggled or lost money during the crisis, even though they carried plenty of duration at a time when investors the world over were scrambling into U.S. Treasuries, pushing their yields down more sharply than they had moved in years; their prices skyrocketed.